Incomplete Contracts with Asymmetric Information: Exclusive v. Optional Remedies

Law and economics scholars have always had a strong interest in contract remedies. Perhaps the most explored issue in contract law has been the desirability of various contract remedies, such as expectation damages, specific performance, or liquidated damages, to name the most common. Scholars have been debating for years, from various perspectives, the comparative advantage of these remedies. Yet, most scholars have assumed that each of these remedies is exclusive, and their work has compared a single remedy contract to another single remedy contract. Interestingly, an analysis that assumes these remedies are optional (or cumulative) has not yet been explored, in spite of the fact that contract law provides the non-breaching party with a variety of optional remedies to choose from in case of a breach, and in spite of the fact that parties themselves write contracts which provide such an option. In this paper we attempt to start filling in this gap by studying the relationship between these remedies. Specifically, we study the conditions at which a contract that grants the non-breaching party an option to choose from optional remedies is superior to an exclusive remedy contract. We show that under conditions of double-sided uncertainty and asymmetric information between a seller (who might breach) and a buyer (who never breaches) the interaction of the parties\u27 distributions should determine whether a contract provides for exclusive or optional remedies. Specifically, if the buyer\u27s conditional expected valuation is larger than the seller\u27s conditional expected valuation (in both cases - conditional that their expected valuation is above the buyer\u27s mean valuation), then a contract which provides the buyer an option to choose between liquidated damages or specific performance (or actual damages) is superior. Our analysis in this paper informs transactional lawyers of the relevant economic factors they should consider when deciding the optimal composition of remedies in a given context. Moreover, our analysis is relevant for courts that interpret contracts because it will help them to better understand whether rational parties would have agreed that a particular remedy would be an exclusive remedy or an optional remedy when the language of the contract is ambiguous. Lastly, our analysis provides yet another economic rationale for why courts should enforce parties\u27 liquidated damages clauses even if it seems ex-post over, or under, compensatory. We present a model which shows when parties will agree on a non-exclusive liquidated damages clause. Under such a contract the parties stipulate ex-ante that the buyer will have the option to choose upon breach whether she prefers an optional remedy, such as actual damages or specific performance, to the pre-determined liquidated damages. We focus on the ex-ante design of the contract in light of the new information that the parties anticipate they will gain after they draft the contract. Therefore, we assume that no renegotiation or investments are involved. We demonstrate the optimal way to design contract clauses which takes advantage of the information that the seller and the buyer receive between the time they enter into the contract and the time of the actual breach. We further suggest that parties indeed use such clauses and that courts honor them. After laying out the basic model we provide some extensions to it. As is well known, an exclusive liquidated damages contract is equivalent to granting the seller a call option to breach and pay, where the exercise price is equal to the amount of the agreed liquidated damages. What is perhaps less known is that a non-exclusive, or optional, contract, where the buyer can choose performance, is equivalent to giving the buyer a consecutive call option with the same exercise price. Yet, the consecutive call option to the buyer does not have to have the same exercise price but can rather have a higher one. We call this new contract a two-price contract and show that it is even more efficient than the basic contract we have explored before. Next, we introduce more rounds of sequential options and show that while the regular ex-ante contract can achieve on average about 4 Indeed, in an environment of asymmetric information renegotiation costs are high. More on this below. 90% of the first-best allocative efficiency, an n-rounds contract approaches the first best, as n goes to infinity. We show numerically that within just 4 rounds, 96% of the allocative efficiency can be achieved. Section two describes the legal background against which we have designed our model. Section three surveys the literature that evaluates contract remedies from an economic perspective. Section four presents a simple model with two-sided incomplete information and with a liquidated damages clause. In section four we compare the performance of a regime with optional remedies with a regime of exclusive remedy and then determine the conditions at which each regime should be applied. Section five discusses some interesting extensions meant to approach the first-best allocative efficiency. The appendix provides a more rigorous mathematical demonstration of the model

Governance tools for board members : adapting strategy maps and balanced scorecards for directorial action

The accountability of members of the board of directors of publicly traded companies has increased over years. Corresponding to these developments, there has been an inadequate advancement of tools and frameworks to help directorial functioning. This paper provides an argument for design of the Balanced Scorecard and Strategy Maps made available to the directors as a means of influencing, monitoring, controlling and assisting managerial action. This paper examines how the Balanced Scorecard and Strategy Maps could be modified and used for this purpose. The paper suggests incorporating Balanced Scorecards in the Internal Process perspective, ‘internal’ implying here not just ‘internal to the firm’, but also ‘internal to the inter-organizational system’. We recommend that other such factors be introduced separately under a new ‘perspective’ depending upon what the board wants to emphasize without creating any unwieldy proliferation of measures. Tracking the Strategy Map over time by the board of directors is a way for the board to take responsibility for the firm’s performance. The paper makes a distinction between action variables and monitoring variables. Monitoring variables are further divided on the basis of two considerations: a) whether results have been met or not and b) whether causative factors have met the expected levels of performance or not. Based on directorial responsibilities and accountability, we take another look at how the variables could be specified more completely and accurately with directorial recommendations for executives

Social Learning and Innovation Cycles

We study social learning and innovation in an overlapping generations model, emphasizing the trade-off between marginal innovation (combining existing technologies) and radical innovation (breaking new ground). We characterize both short-term and long-term dynamics of innovation, and the intergenerational accumulation of knowledge. Innovation cycles emerge endogenously, but the number of cycles is finite almost surely, and radical innovation terminates in finite time. We identify a negative relationship between past successes and the magnitude of radical innovation, combining insights from the multi-armed bandit literature with a spatial representation of innovation. Past successes reduce the incremental value of experimentation, and result in less ambitious innovation. In our framework, patents promote radical innovation through two channels: by increasing the expected benefit of radical innovation and by increasing the cost of marginal innovation. Our analysis suggests that sustaining radical innovation in the long-run requires external intervention

Cryptic prophages help bacteria cope with adverse environments

Phages are the most abundant entity in the biosphere and outnumber bacteria by a factor of 10. Phage DNA may also constitute 20% of bacterial genomes; however, its role is ill defined. Here, we explore the impact of cryptic prophages on cell physiology by precisely deleting all nine prophage elements (166 kbp) using Escherichia coli. We find that cryptic prophages contribute significantly to resistance to sub-lethal concentrations of quinolone and β-lactam antibiotics primarily through proteins that inhibit cell division (for example, KilR of rac and DicB of Qin). Moreover, the prophages are beneficial for withstanding osmotic, oxidative and acid stresses, for increasing growth, and for influencing biofilm formation. Prophage CPS-53 proteins YfdK, YfdO and YfdS enhanced resistance to oxidative stress, prophages e14, CPS-53 and CP4-57 increased resistance to acid, and e14 and rac proteins increased early biofilm formation. Therefore, cryptic prophages provide multiple benefits to the host for surviving adverse environmental conditions

A standardized approach to treat complex aortic valve endocarditis: a case series

Background Surgical treatment of complicated aortic valve endocarditis often is challenging, even for experienced surgeons. We aim at demonstrating a standardized surgical approach by stentless bioprostheses for the treatment of aortic valve endocarditis complicated by paravalvular abscess formation. MethodsSixteen patients presenting with aortic valve endocarditis (4 native and 12 prosthetic valves) and paravalvular abscess formation at various localizations and to different extents were treated by a standardized approach using stentless bioprostheses. The procedure consisted of thorough debridement, root replacement with reimplantation of the coronary arteries and correction of accompanying pathologies (aortoventricular and aortomitral dehiscence, septum derangements, Gerbode defect, total atrioventricular conduction block, mitral and tricuspid valve involvement).ResultsAll highly complex patients included (14 males and 2 females; median age 63 years [range 31–77]) could be successfully treated with stentless bioprostheses as aortic root replacement. Radical surgical debridement of infected tissue with anatomical recontruction was feasible. Although predicted operative mortality was high (median logarithmic EuroSCORE I of 40.7 [range 12.8–68.3]), in-hospital and 30-day mortality rates were favorable (18.8 and 12.5% respectively). ConclusionsRepair of active aortic valve endocarditis complicated by paravalvular abscess formation and destruction of the left ventricular outflow tract with stentless bioprosthesis is a valuable option for both native and prosthetic valves. It presents a standardized approach with a high success rate for complete debridement, is readily available, and yields comparable clinical outcomes to the historical gold standard, repair by homografts. Additionally, use of one type of prosthesis reduces logistical issues and purchasing costs

Unauthorized Horizontal Spread in the Laboratory Environment: The Tactics of Lula, a Temperate Lambdoid Bacteriophage of Escherichia coli

We investigated the characteristics of a lambdoid prophage, nicknamed Lula, contaminating E. coli strains from several sources, that allowed it to spread horizontally in the laboratory environment. We found that new Lula infections are inconspicuous; at the same time, Lula lysogens carry unusually high titers of the phage in their cultures, making them extremely infectious. In addition, Lula prophage interferes with P1 phage development and induces its own lytic development in response to P1 infection, turning P1 transduction into an efficient vehicle of Lula spread. Thus, using Lula prophage as a model, we reveal the following principles of survival and reproduction in the laboratory environment: 1) stealth (via laboratory material commensality), 2) stability (via resistance to specific protocols), 3) infectivity (via covert yet aggressive productivity and laboratory protocol hitchhiking). Lula, which turned out to be identical to bacteriophage phi80, also provides an insight into a surprising persistence of T1-like contamination in BAC libraries

Multi-ancestry fine mapping of interferon lambda and the outcome of acute hepatitis C virus infection

Clearance of acute infection with hepatitis C virus (HCV) is associated with the chr19q13.13 region containing the rs368234815 (TT/ΔG) polymorphism. We fine-mapped this region to detect possible causal variants that may contribute to HCV clearance. First, we performed sequencing of IFNL1-IFNL4 region in 64 individuals sampled according to rs368234815 genotype: TT/clearance (N = 16) and ΔG/persistent (N = 15) (genotype-outcome concordant) or TT/persistent (N = 19) and ΔG/clearance (N = 14) (discordant). 25 SNPs had a difference in counts of alternative allele >5 between clearance and persistence individuals. Then, we evaluated those markers in an association analysis of HCV clearance conditioning on rs368234815 in two groups of European (692 clearance/1 025 persistence) and African ancestry (320 clearance/1 515 persistence) individuals. 10/25 variants were associated (P < 0.05) in the conditioned analysis leaded by rs4803221 (P value = 4.9 × 10−04) and rs8099917 (P value = 5.5 × 10−04). In the European ancestry group, individuals with the haplotype rs368234815ΔG/rs4803221C were 1.7× more likely to clear than those with the rs368234815ΔG/rs4803221G haplotype (P value = 3.6 × 10−05). For another nearby SNP, the haplotype of rs368234815ΔG/rs8099917T was associated with HCV clearance compared to rs368234815ΔG/rs8099917G (OR: 1.6, P value = 1.8 × 10−04). We identified four possible causal variants: rs368234815, rs12982533, rs10612351 and rs4803221. Our results suggest a main signal of association represented by rs368234815, with contributions from rs4803221, and/or nearby SNPs including rs8099917

Improving automobile insurance ratemaking using telematics: incorporating mileage and driver behaviour data

We show how data collected from a GPS device can be incorporated in motor insurance ratemaking . The calculation of premium rates based upon driver behaviour represents an opportunity for the insurance sector . Our approach is based on count data regression models for frequency, where exposure is driven by the distance travelled and additional paramete rs that capture characteristics of automobile usage and which may affect claiming behaviour . We propose implement ing a classical frequency model that is updated with telemetrics information. We illustrate the method using real data from usage - based insurance policies. Results show that not only the distance travelled by the driver, but also driver habits, significantly influence the expected number of accidents and, hence, the cost of insurance coverage . This paper provides a methodology including a transition pricing transferring knowledge and experience that the company already had before the telematics data arrived to the new world including telematics information incorporated in motor insurance ratemaking . The calculation of premium rates based upon driver behaviour represents an opportunity for the insurance sector. Our approach is based on count data regression models for frequency, where exposure is driven by the distance travelled and additional parameters that capture characteristics of automobile usage and which may affect claiming behaviour. We propose implementing a classical frequency model that is updated with telemetrics information. We illustrate the method using real data from usage - based insurance policies. Results show that not only the distance travelled by the driver, but also driver habits, significantly influence the expected number of accidents and, hence, the cost of insurance coverage . This paper provides a methodology including a transition pricing transferring knowledge and experience that the company already had before the telematics data arrived to the new world including telematics information

Temporal changes in HCV genotype distribution in three different high risk populations in San Francisco, California

Abstract Background Hepatitis C virus (HCV) genotype (GT) has become an important measure in the diagnosis and monitoring of HCV infection treatment. In the United States (U.S.) HCV GT 1 is reported as the most common infecting GT among chronically infected patients. In Europe, however, recent studies have suggested that the epidemiology of HCV GTs is changing. Methods We assessed HCV GT distribution in 460 patients from three HCV-infected high risk populations in San Francisco, and examined patterns by birth cohort to assess temporal trends. Multiple logistic regression was used to assess factors independently associated with GT 1 infection compared to other GTs (2, 3, and 4). Results Overall, GT 1 was predominant (72.4%), however younger injection drug users (IDU) had a lower proportion of GT 1 infections (54.7%) compared to older IDU and HIV-infected patients (80.5% and 76.6%, respectively). Analysis by birth cohort showed increasing proportions of non-GT 1 infections associated with year of birth: birth before 1970 was independently associated with higher adjusted odds of GT 1: AOR 2.03 (95% CI: 1.23, 3.34). African-Americans as compared to whites also had higher adjusted odds of GT 1 infection (AOR: 3.37; 95% CI: 1.89, 5.99). Conclusions Although, HCV GT 1 remains the most prevalent GT, especially among older groups, changes in GT distribution could have significant implications for how HCV might be controlled on a population level and treated on an individual level